Excerpt:.....23-a applicable in assessee's case for assessment year 1957-58 - availability of profits in year in question out of which dividends could be declared is important consideration that should be investigated in applying section 23a - permissible for income tax officer (ito) to take assessment result of accounting year in question - additions to returned profits as result of disallowance of claims for deduction allowed - held, tribunal have to dispose appeal afresh in light of this observations.
- - 26,275. on the view that the assessee failed to declare 60% of the balance as dividend, the third additional income-tax officer, coimbatore, applied the provisions of section 23a and directed payment of rs. at the instance of the assessee the question referred to us under section..........it invariably incurred losses. in the year 1956-57 it showed sizable profits. in the assessment year in question, the total income was eventually determined at rs. 51,099 and the tax liability for that year at rs. 26,275. on the view that the assessee failed to declare 60% of the balance as dividend, the third additional income-tax officer, coimbatore, applied the provisions of section 23a and directed payment of rs. 9,155.28 as tax on the undistributed profits. in doing so, he did not accept the statement of the assessee in reply to a notice given by him under section 23a that because the company was running at a loss ever since its incorporation till march 31, 1956, the provisions of section 23a should not be applied. the figures presented by the assessee before the income-tax.....

Judgment:

Veeraswami, J.

1. This matter relates to the assessment year 1957-58. The assessee was an incorporated company which commenced the business in 1947. Up to 1951-52 it made profits, but thereafter until the year 1955-56 it invariably incurred losses. In the year 1956-57 it showed sizable profits. In the assessment year in question, the total income was eventually determined at Rs. 51,099 and the tax liability for that year at Rs. 26,275. On the view that the assessee failed to declare 60% of the balance as dividend, the Third Additional Income-tax Officer, Coimbatore, applied the provisions of Section 23A and directed payment of Rs. 9,155.28 as tax on the undistributed profits. In doing so, he did not accept the statement of the assessee in reply to a notice given by him under Section 23A that because the company was running at a loss ever since its incorporation till March 31, 1956, the provisions of Section 23A should not be applied. The figures presented by the assessee before the Income-tax Officer exhibited that the company had earned a net profit of Rs. 93,488 for the year ended March 31, 1957, and an accumulated loss of Rs. 74,658, leaving a credit balance of Rs. 18,831 but the tax liability determined being Rs. 26,275, there was literally no profit left for destribution of any divident.' But the Income-tax Officer was not prepared to go by the book results of the assessee. He took into account over a lakh of rupees that had been added in the assessments for earlier years on account of the defects in the accounts, since, as is stated, the assessee company was not able to show that the expenses claimed for deduction had really been incurred. On the basis of the assessed results, the Income-tax Officer concluded that there was no justification for the assessee's stand that there remained no divisible profit for the year ended March 31, 1957, for declaring dividends. The Appellate Assistant Commissioner followed the book results of the assessee and agreed with it that for the assessment year in question ithad no profits in its hands out of which dividends could be declared. He observed that most of the additions were outgoings in the shape of expenses which were not allowed to a certain extent as there was no sufficient proof though they had been incurred and that the amount on this account was not available to the assessee to be taken into consideration for distribution of dividends in the accounting year. On appeal by the department, the Tribunal restored the order of the Income-tax Officer. At the instance of the assessee the question referred to us under Section 66(1) is :

' Whether, on the facts and in the circumstances of the case, the provisions of Section 23A are applicable to the assessee's case for the assessment year 1957-58 '

2. We are inclined to think that the Tribunal has misdirected itself on the principles that should apply in applying Section 23A and, further, a reading of its order shows that it failed to have a precise appreciation of the facts, particularly as to the availability of profits in the assessment year for distribution as dividend. The Tribunal purported to rely on Sir Kasturchand Ltd. v. Commissioner of Income-tax and found that the only consideration that should weigh with Income-tax Officer in applying Section 23A is as regards the smallness of the profits made in the previous year or the loss incurred in the earlier years. That view can no longer be supported. Sir Kasturchand Ltd. v. Commissioner of Income-tax, : [1949]17ITR493(Bom) has since been overruled by the Supreme Court in Commissioner of Income-tax v. Gangadhar Banerjee & Co. (P.) Ltd., : [1965]57ITR176(SC) The Supreme Court there has pointed out that, in determining the reasonableness or unreasonableness in the context of applying Section 23A, the authority concerned should be guided by business considerations such as previous losses, the present profits, the avilability of surplus money and the reasonable requirements of the future and similar others. It is only on taking an overall picture of the financial position of the business of the assessee that the Income-tax Officer would be in a position to properly weigh the reasonableness or unreasonableness of the amount to be distributed or not to be distributed as dividend. In Indian Commerce and Industries Co. Ltd. v. Commissioner of Income-tax, : [1966]60ITR229(Mad) this court, after referring to the judgment of the Supreme Court, said this :

' Section 23A being of a penal nature, the burden is on the revenue to show that the conditions for making an order are satified. In determining the effect of withheld profits, the Income-tax Officer should consider matters from the point of view of the board of directors. He must arrive at a finding that further or larger dividend than that declared would not be unreasonable, with reference not only to the losses incurred by the company in earlier years and the smallness of the profits made during the relevant year but also to all other relevant circumstances. '

3. The Supreme Court in that case did not find it possible to lay down any concrete tests of reasonableness in the context and pointed out that the only guidance was the Income-tax Officer's capacity to put himself in the position of a prudent business man or the director of a company and his sympathetic and objective approach to the difficult problem that arises in each case. It is clear, therefore, that the Tribunal in this case took too narrow a view of the factors that ought to be taken into consideration in applying Section 23A.

4. Availability of profits in the year in question, out of which dividends could be declared, is an important consideration that should be investigated and ought to weigh with the revenue as well as the Tribunal in applying Section 23A. While on that consideration it would be permissible for the Income-tax Officer to take the assessment result of the accounting year in question and view the additions to the returned profits as a result of disallowance of claims for deduction on the ground that the outgoings had not been proved, as part of the profits of the accounting year. That much is clear from Gobald Motor Service (P.) Ltd. v. Commissioner of Income-tax, : [1966]60ITR417(SC) . But whether this proposition holds good in respect of similar additions to profits in earlier years is a point not considered and decided by the Tribunal which arises in the case. While on the one hand the assessee would maintain that on the basis of its book results there would be no profit available in its hands in the accounting year for distribution as dividend after paying the tax liability for that year, the revenue urges to the contrary on the basis of the assessment results for the year in question as well as the earlier years. In other words, the revenue would add to the book results, the profits for the earlier years' outgoings disallowed for want of proof. Apart from these considerations, the assessee would further say that even on the basis of the assessment results, there would be no funds available in the hands of the assessee for distribution as dividend for the assessment year in question. Though the Tribunal in its order has referred to the figures with reference to the books and the assessment orders for the several earlier years and their resulting position, we are of the view that it has not precisely applied its mind to the accurate position. For instance, in paragraph 16 of its order, the Tribunal makes this statement:

' In working out a loss of Rs. 93,084 the assessee has taken the net figure instead of showing the income of that year. This gives an altogether incorrect picture.'

5. This shows that the Tribunal has not properly appreciated the facts.

6. We answer the reference in favour of the assessee which means the Tribunal will have to dispose of the appeal afresh in the light of the observations contained in this judgment and according to law. There will be no order as to costs.